Tower Private Advisors
- Reviving a Dead Horse
- Minutes of August 9 FOMC meeting
- September 7, 2011, Federal Reserve Beige Book report
- Here’s a positive–they’re tough to come by
- Okay economics
Capital Markets Recap
Interesting stuff here… Developed Europe got pounded this week, but Emerging Markets were down less than 1%. The CBOE Volatility Index, aka the Fear Index, shot up by 28.1% this week. Historically, it hasn’t paid to rush out of stocks when it’s reached these levels. The dollar rallied hard this week, and that bodes ill for non-U.S. stocks and commodities, including the darling of commodities, gold (dollar chart below.)
The market (S & P 500) bottomed on August 8 at 1,101.54. We expect that level to be tested, or revisted again. We’ll watch carefully to see what goes on below the surface (number of new lows, etc.) So long as we can stay close to above that level, we’ll be okay with current portfolio allocations. If the lows are decisively taken out, however, we’ll take decisive action.
Europe, Europe, Europe, Greece, Europe, Germany, Europe
The Greek 1-year note now yields 90.9%, and the cost to ensure against a default of the same requires a premium of 73.6% of the face value; six-month protection is worse, at 79.4%. Default protection against a two-year note, however, is just 52%. I don’t know credit default swaps well enough to know why it would be cheaper to insure longer maturities, but clearly the market thinks that default is more likely for the nearer-in paper, and any haircuts banks would have to take would be more significant on shorter-term debt. Obviously, it doesn’t mean a default on the 1-year year note means a default on the 2-year or the 5-year note. It does seem to imply–for now, at least–that if Greece can make it past six months (and what making it means) the risk goes down. The situation in Europe was exacerbated this week as the extreme tunnel-visioned European Central Bank did not cut interest rates. The ECB has an inflation mandate, meaning that is it’s primary concern is inflation, not economic weakness, or crisis, or anything else. As if that wasn’t enough, the lone German member of the ECB’s Executive Board, Jurgen Stark, resigned for quote-un-quote “personal reasons,” but, unofficially, because he disagreed with the ECB’s policies. Featured below is the ECB’s Executive Board, and–hello, Central Casting? will someone please call a tailor. I did not doctor the photo. That is the made-for-television token German, Herr Stark under the arrow (does his wife not help him with his wardrobe, glasses, and hair?). I’ll bet these fellows are a barrel of monkeys when they get a few economic reports under their belts. Also, Bloomberg reported that Germany is preparing a backstop for its banks in the event that Greece defaults–specifically, if German banks are expected to write down the value of the Greek debt they hold.
Uh…naturally, Greece is committed to “full implementation” of the things required of it to continue to receive bailout funds.
- Yahoo! fired its CEO Carol Bartz and replaced her with an interim chief. Those shares are up by 12% since the close before the announcement, but they rose most when a large shareholder demanded that their be changes to the Board.
- Paul Tudor Jones is legendary among hedge funds, and this week a couple of his executives said they were leaving his hedge fund to start a firm focusing on Emerging Markets investments.
- John Paulson, who knocked the ball out of the park in 2007 (+96%) by betting against mortgage backed securities, is having–as the British would say-a rough go of it this year. His so-called flagship fund was down by 34% through the end of August.
‘Wish I had a restaurant to review . . .
We all know that the service sector makes up something like 70% of our GDP, with the other 30% being comprised of manufacturing. It was, therefore, a surprise to most to see the Institute for Supply Management’s Service Sector Composite (ISM Non-Manufacturing) index perk up in August, when all sorts of things were hitting fans. Economists expected the index to fall to 51 (50 is considered the dividing line between an expanding and contracting economy; the actual line is somewhere around 47); instead the index rose slightly, to 53.3.
Here’s something that gets missed–it doesn’t help that I’ve never mentioned it here before. The Bureau of Labor Statistics releases a monthly report called the Job Openings and Labor Turnover Survey (naturally, it’s called the JOLTS report). It reports on the number of job openings then available. The latest report, issued on Wednesday, but reporting July figures, showed there were 3.2 MILLION jobs available. According to the BLS, that’s still 1.2 million below the pre-recession figure, but it’s also 1.1 million higher than the 2009 trough.
The Federal Reserve issued its Beige Book, its periodic report on economic activity in all 12 Federal Reserve districts. There are no fancy charts, just a black and white text summary, followed by separate reports from each district. If you want see the report boiled down and gussied up–although I’m not sure you can gussy and and boil down something–you can click here.
Finally–as far as I’m concerned–Initial Jobless Claims were a bit higher than expected (414,000 v. 405,000) and higher than the previous week’s (414,000 v. 409,000).
This week, however, the market is properly occupied with goings on–or goings under–in Europe, as it rightly should be. Still, U.S. economic releases this week were, in aggregate, better than economists expected, meaning they remain too pessimistic. Here it is graphically, when the white line’s rising, economists are too pessimistic; falling, they’re too optimistic. Bogeyman #1 is Europe. Bogeyman #2 is economic weakness in the U.S.
Unlike this week, which had just a handful of releases, next week is chock full.
Key indicators to watch
- NFIB Small Business Optimism (Tuesday) – August
- Retail Sales (Wednesday) – August
- Producer Price Index (Wednesday) – August
- Consumer Price Index (Thursday) – August
- Initial Jobless Claims (Thursday) – weekly
- Industrial Production (Thursday) – August
- Capacity Utilization (Thursday) – August
- University of Michigan Consumer Confidence (Friday) – preliminary September
- Empire State Manufacturing index (Thursday) – September
- Philadelphia Federal Reserve index (Thursday) – September